Cryptocurrency is digital money that doesn’t require a bank or financial institution to verify transactions and can be used for purchases or as an investment. Transactions are then verified and recorded on a blockchain, an unchangeable ledger that tracks and records assets and trades

In the second part of our guide to cryptocurrency, NMTBP explains what you need to know before buying a digital currency

What is cryptocurrency?

Cryptocurrency, or crypto, is a digital payment platform that eliminates the need to carry physical money. It exists only in digital form, and although people mainly use it for online transactions, you can make some physical purchases. Unlike traditional money printed only by the government, several companies sell cryptocurrency

Cryptocurrencies are fungible, meaning the value remains the same when bought, sold, or traded. Cryptocurrency isn’t the same as non-fungible tokens (NFTs) with variable values. For example, one dollar in crypto will always be one dollar, whereas the value of one NFT dollar depends on the digital asset it’s attached to

Cryptocurrency vs. traditional currency

The government produces traditional currency in paper bills and coins you can carry or put in a bank. You can use it for purchases and other transactions that require cash. The government backs traditional currency, while cryptocurrency has no government, bank, or financial institution controls

While you can hold traditional currency in a bank or financial institution, you store cryptocurrencies in a digital wallet. Banks insure money kept in bank accounts against loss, while crypto has no recourse in the event of a loss

Types of cryptocurrency 

Cryptocurrency is available as coins or tokens. The difference between them is that tokens are assets that exist on a blockchain, while coins can be virtual, digital, or tangible. Coins are more like traditional money; a digital coin has its own blockchain.  Conversely, a token is created on an existing blockchain and can be used as currency or to represent asset ownership

The first cryptocurrency introduced was Bitcoin, the most commonly traded one. Ethereum is the second most valuable cryptocurrency and can be used for complex transactions. Other more common cryptocurrencies, called altcoins, include Cardano, Solana, Dogecoin, and XRP

How to get started with cryptocurrencies

To start with cryptocurrency, you’ll need to choose a broker or crypto exchange. An exchange is an online platform where you can trade cryptocurrencies. Brokers use interfaces that interact with exchanges

An exchange allows you to trade without a third party. Should you decide to use an exchange, you’ll need to find buyers for your cryptocurrency. A broker can do that for you. Here are the steps to start trading cryptocurrencies

1. Create and fund your account

When you’ve selected a broker or exchange, the next step is to open an account. You’ll want to keep a form of identification nearby since some platforms require it. Once you verify your identity, you can fund your account. Depending on your funding method, you may need to wait a few days for it to clear into your crypto account

2. Buy crypto

Here are the best places to buy cryptocurrencies in the UK:

eToro– Good for beginners and experts; 70+ Cryptocurrencies

Coinbase– Beginner friendly; Crypto card; 240+ Cryptoassets

CoinJar– Ready-made crypto portfolios; 50+ Cryptocurrencies‍

Uphold– Crypto card; 3 National currencies; 250+ Cryptoassets

Kraken– Low cost; Staking rewards; 200+ Cryptocurrencies

Here is a list of the top 10 cryptocurrencies by market capitalisation in 2023

3. Select a storage method

Most often, you’ll store cryptocurrency in a wallet. When you purchase from a broker, you might not have an option regarding how you store your crypto. However, you can choose between a hot or cold wallet when purchasing through an exchange

Hot wallets

A hot wallet offers online storage that you can access from a computer, phone, or tablet. A hot wallet has a security risk because it’s stored on the internet and is more susceptible to cyber-attacks

Cold wallets

A cold wallet doesn’t connect to the internet. You can store your cryptocurrency in an external drive, such as a USB device. You’ll receive a keycode to keep in a safe place. Should you lose the keycode, you may lose your cryptocurrency

Tax on Cryptocurrencies in the UK

Although government regulations are absent from the cryptocurrency market, they are taxable assets. You must file any profit or loss with the Inland Revenue

HM Revenue & Customs (HMRC) has provided guidance to help people determine whether they need to pay tax on their cryptoassets.In a nutshell, here are the key aspects you need to know about taxes when you receive or sell cryptocurrencies:

Tax When You Receive Cryptoassets

The tax rules depend on the specific transaction circumstances. Generally, you may need to pay Income Tax and National Insurance contributions if you receive cryptoassets as income. You don’t pay tax when you purchase cryptocurrencies. If your employer pays you in readily convertible cryptoassets (easily exchanged for cash), they must handle Income Tax and National Insurance through PAYE. If the assets aren’t readily convertible, you should ask your employer about your Income Tax and, if necessary, complete a Self-Assessment tax return‍

‍Tax When You Sell Cryptoassets

Tax rules for selling cryptoassets also depend on the specific transaction circumstances. Generally, you pay Capital Gains Tax (CGT) when your gains from selling certain assets exceed the tax-free allowance. This tax year, the CGT allowance has been reduced to  £6,000. You may need to pay CGT when you sell cryptoassets, exchange them for a different type, use them to pay for goods or services or give them away You don’t need to pay Capital Gains Tax on the value of cryptoassets you’ve already paid Income Tax on but will need to pay it on any gains made afterwards

‍Ready to get into cryptocurrency? 

Cryptocurrency offers opportunities for investing, trading, and employment. Before getting started, you can learn more about crypto technology and how it works online:

Bitcoin and Cryptocurrency Technologies, offered by Princeton University, is an online course that explains how Bitcoin works and what makes it different. The course explains what determines the price and the future of crypto

Blockchain and Cryptocurrency Explained is a beginner-level certificate course that takes approximately nine hours to complete. The course is offered by the University of Michigan and explains how blockchain works and the strengths and weaknesses of cryptocurrency

As before, good luck and caveat emptor!